One of the main things that spooked the market today was the report of a 0.7% increase in the Q2 employment cost index (ECI), a quarterly index covering total employment costs including health and other benefits in addition to wages. Although this was largest quarter-on-quarter increase since the recession, observers generally failed to consider that there was a 0.35% drop in the previous quarter so about half the change was "bounce back" from Q1. The year-over-year that gives a more reliable picture showed an increase of only 2.1%, about the same that prevailed in 2011 and only slightly above the 1.8% to 1.9% level that has prevailed since 2012.
Reporters jumped on the fact that it was the highest quarterly increase since the recession because everyone on Wall Street is anxious to see signs of inflation that will provoke the Fed into tightening money and driving interest rates up. They tended to overlook the more meaningful measure of inflation contained in last week's Q2 GDP report. This measure, the PCE price index which is the one the Fed watches, showed June headline inflation running at only 1.6% year-over-year, and the more meaningful core PCE at only 1.5%, well below the Fed's 2.0% target.
Our society, of course, has been conditioned to cheer for higher interest rates because the oligarchs are tired of getting such meager returns on the trillions they have stashed away in Treasuries and other safe short-term securities, and they are fearful of the risks in higher yielding investments. The 0.01% don't mind if tight money brings another recession, or even if it curbs the exuberance of the stock market because that's not that their thing. They leave the grubby, rough and tumble business of running companies and making venturesome investments to the 9.99% (10 - 0.01), preferring the safe and comfortable life of clipping coupons.
A glance at the chart below shows the true picture of employment cost inflation over the last decade. As you can see, that sharp little up tick at the extreme right side of the chart is nothing to get worked up about. Employment cost inflation is still running far below pre-recession levels, more like 2% instead of the 3.5% to 4% earlier in the decade. One of the main reasons for the much lower rate, by the way, is the sharp slowing of the annual increase in health benefit costs from 12% to 2%.
So if you are like just about everyone else, anxiously sitting on the edge of your chair expecting inflation to break out any moment, the Fed to reverse course, and interest rates to soar through the roof --- RELAX, IT AIN'T GONNA HAPPEN ANYTIME SOON.
